Obama proposes short-term budget fix, Republicans swiftly object

WASHINGTON (Reuters) - President Barack Obama on Tuesday urged Congress to pass a small package of spending cuts and tax reforms to delay larger, automatic cuts from going into effect and damaging the economy on March 1.

Republican leaders quickly rebuffed his proposals, rejecting what they saw as a bid for new tax increases after lawmakers agreed to raise rates for top U.S. earners earlier this year.

If launched as scheduled, the cuts - dubbed the "sequester" - would reduce federal spending across the board by about $85 billion for one year, split evenly between military and domestic programs. The total of reductions through 2022 would amount to roughly $1.2 trillion.

Obama said he still believed a broad, balanced plan to achieve $4 trillion in deficit reduction was possible, and he said his proposals to do so during "fiscal cliff" talks with Republican Speaker of the House John Boehner last year were still on the table.

With only a few weeks before the spending cuts go into force, however, Obama urged lawmakers to agree to a small package now that would avert economic damage and give them more time to negotiate a broader deal.

"So if Congress can't act immediately on a bigger package ... then I believe that they should at least pass a smaller package of spending cuts and tax reforms that would delay the economically damaging effects of the sequester for a few more months until Congress finds a way to replace these cuts with a smarter solution," Obama told reporters.

"Congress is already working towards a budget that would permanently replace the sequester. At the very least, we should give them the chance to come up with this budget, instead of making indiscriminate cuts now that will cost us jobs and significantly slow down our recovery," he said.

The budget deficit for fiscal 2013 will dip to $845 billion after four straight years of $1 trillion-plus deficits, the Congressional Budget Office said on Tuesday, largely because of the higher taxes being paid by wealthy Americans. The analysis assumes that the $85 billion in spending cuts that Obama wants to avoid will go into effect on March 1.

Reactions from Republicans suggested that was likely.

"Sorry, President Obama, but no more tax increases for even more government spending," said Republican Senator Pat Toomey in a statement. "We should keep our word to the American people and keep the spending cuts you signed into law."

Senate Republican Leader Mitch McConnell, who helped secure the deal that avoided the "fiscal cliff," said Obama needed to lay out specific spending cut ideas and abandon his tax push.

"The American people will not support more tax hikes in place of the meaningful spending reductions both parties already agreed to and the president signed into law," McConnell said in a statement. "Now that Congress has acted on the tax issue, the president needs to lay out significant spending reforms — the other side of the ‘balance' as he defines it," he said.

ECONOMIC PAIN

Obama has been reaching out to business leaders to support his domestic policy agenda, meeting with a group at the White House on Tuesday.

But a large group of chief executives rejected his proposal.

"Hiking taxes and forgoing improvements in our nation's long-term competitiveness in favor of short-term budget choices would move us in the wrong direction," said John Engler, president of the Business Roundtable, which represents chief executives in Washington.

Engler said tax changes should be made in the context of broad reform. The group would prefer a more thoughtful allocation of spending cuts than sequestration, he said.

The White House and Congress agreed on a deal at the beginning of this year that avoided the "fiscal cliff" of spending cuts and tax increases by raising tax rates on households making more than $450,000 a year. During these negotiations, Obama offered a means to reach $4 trillion in deficit reductions.

The deal put off the huge spending cuts for just two months.

The Republican-controlled House last year passed two measures that sought to replace the sequester cuts and shield military spending by shifting the burden onto domestic programs, including many that serve the poor, such as Medicaid, food stamps and social services block grants that fund programs like Meals on Wheels. The measure was never taken up in the Democratic-controlled Senate.

Obama's statement is the latest in a series of moves to outline his policy agenda before his State of the Union address on February 12. The president has recently made trips outside of Washington to promote proposals to reform immigration and reduce gun violence.

Obama's push for a short-term deal to avoid the sequester comes after a sharp drop in defense spending helped cause U.S. economic output to shrink at the end of last year. The White House has attacked Republican leaders for threatening to use the sequestration deadline as a bargaining chip to obtain cuts to government retiree and healthcare programs.

The U.S. economy contracted by 0.1 percent in the last three months of 2012 on the deepest plunge in defense spending in 40 years.

Outgoing Defense Secretary Leon Panetta said on Sunday the cuts would be deeply harmful and make it more difficult to respond to crises in the world. His designated successor, Chuck Hagel, has made similar warnings.